IMF urges Japan to push ahead with second sales tax hike

TOKYO, Oct 7 (Reuters) - Japan must raise its sales tax
again next year as scheduled, the International Monetary Fund
said, even as it sharply cut its economic forecasts for the
country and warned that the higher levy will take a toll on
domestic demand.

The Bank of Japan (BOJ) should ease monetary policy further
if inflation stalls or economic growth disappoints, though such
action should be accompanied by structural reforms and efforts
to boost Japan's long-term growth potential, the IMF said in its
World Economic Outlook report on Tuesday.

Japan raised the sales tax to 8 percent from 5 percent in
April to curb its massive public debt and pay for the rising
cost of welfare for a rapidly ageing population. Premier Shinzo
Abe has said he will decide by year-end whether to proceed with
a second tax hike to 10 percent in October 2015, after
scrutinising whether the economy can weather the pain.

"Given very high public debt, implementation of the second
consumption tax increase is critical to establish a track record
of fiscal discipline but is likely to take a toll on domestic
demand, underscoring the importance of a pickup in confidence
and investment," the report said.

The IMF slashed Japan's economic growth forecast for this
year by 0.7 percentage point from three months ago, the biggest
cut among advanced economies, to a 0.9 percent increase.

It also cut Japan's growth forecast for next year by 0.2
point to a 0.8 percent rise.

"The sharp economic contraction in the second quarter
induced by the consumption tax increase is expected to be short
lived, with a moderate pace of recovery returning thereafter,"
the IMF said.

Abe's aggressive monetary and fiscal stimulus, dubbed the
first and second arrows of "Abenomics," helped boost business
confidence by weakening the yen and lifting Tokyo share prices.

But the pain from the April tax hike pushed the economy into
a severe contraction in the second quarter, with only a moderate
rebound seen in July-September. There is also growing market
concern over the slow pace of Abe's third-arrow growth
strategies to boost the country's long-term potential.

"In Japan, more forceful structural reforms (the third arrow
of Abenomics) are needed to boost potential growth and move
decisively away from deflation," the IMF said, calling for steps
to increase labour supply and deregulation of highly-protected
agricultural and service sectors.

"The task of boosting growth is also critical in light of
the challenges posed by high public debt and the need for
sizable fiscal consolidation - for which a concrete medium-term
plan beyond 2015 is urgently needed," it said.

The IMF also urged the BOJ to do more to enhance
communication on its monetary policy, such as clarifying the
indicators used to assess whether inflation is on track to meet
its 2 percent target.

"This effort would also help guide expectations when a need
arises to adjust the asset purchase program and facilitate
preparations for eventual exit," the report said.

Under its stimulus programme launched in April last year,
the BOJ has pledged to double base money via aggressive asset
purchases to achieve its 2 percent inflation target in roughly
two years, though economists are sceptical it can do so within
such a timeframe and believe more stimulus may be needed.

The central bank has said the wall of money it pumps out to
the economy will heighten inflation expectations, but has not
identified which indicators it looks at in gauging inflation
expectations.
(Reporting by Leika Kihara; Editing by Kim Coghill)